Expense Account Fraud Can Cost More Than You Think

May 23, 2006 — 1,949 views  
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It probably seems like a relatively minor infraction to many employees: Write off the dry cleaning bill for a blouse stained during a business trip by adding the cost to the expense account. And, in truth, one small dry cleaning tab might not be such a big deal – if it stopped there. Too often, however, padding the expense account turns into a cottage industry for employees, an industry for which you may be footing a significant bill.

Know Forms of Fraud

There are as many ways to cheat on an expense account as there are employees willing to cheat, but four common methods are:

1. Mischaracterizing expenses. This involves legitimate receipts for nonbusiness-related activities. If Joe treats his buddy John to a birthday dinner, for example, that generates an actual receipt, but it shouldn’t show up on Joe’s expense account.

2. Requesting multiple reimbursements. This is a riskier scheme, but just as simple. If Joe wants you to pay for John’s birthday dinner twice, he can just copy the receipt and turn it in on another expense report. Worse, he can attempt to be paid once for the bill, once for the receipt and once for the credit card statement.

3. Overstating expenses. When people overstate expenses, they request reimbursement for more than they spend. Changing a 3 to an 8 or a 1 to a 4 on a receipt is one popular approach.

4. Inventing Expenses. This is probably the easiest way for an employee to get you to foot more than your share of the bill. All Jane needs to do is ask a cabbie for an extra receipt, fill it out with the numbers of her choice and turn it in for reimbursement.

These and other small expense account infractions can add up to outrageous sums. In one case, a senior vice president who traveled extensively for business was found to have defrauded his firm of $30,000 over the course of three years by adopting a liberal definition of allowable business expenses.

In a 2002 study by Ernst & Young and Ipsos Reid, 7 percent of respondents said they knew people who inflated expense accounts. The study showed that junior employees under 35 who have been with their companies more than three years are the most likely to commit fraud. But managers tend to get away with larger amounts.

Pay More Than Lip Service

In most cases, expense account fraud can be averted if companies implement fraud control policies and procedures and then enforce them. Too often, companies establish policies, but fail to make sure they’re followed correctly.

So once you have an expense report policy in place, communicate it. Be sure Susan knows her dry cleaning costs aren’t reimbursable and Joe understands that updating his friends on his work schedule doesn’t constitute a business dinner. This prevents misunderstandings and makes punishing infractions, when they occur, easier.

Also be sure a manager keeps abreast of employee business travel plans and other activities that might trigger expense reports. If someone submits a bill for a dinner in Toledo, his or her supervisor should have known about the trip before it happened. The supervisor should review every expense turned in, and require original receipts for everything. If a photocopied receipt is necessary – and sometimes it is – the supervisor should inspect it carefully for signs of tampering.

While computerized expense tracking software can’t substitute for hands-on expense account reviews, it can help spot inconsistencies that develop over time. A computer program makes it easy to see if someone’s expenses have soared in recent months or are noticeably higher than those of others in the department. A fraud-reporting hotline is also a good idea. It encourages anonymous reports of misdoings and signals that the company is serious about eliminating fraud.

Be Reasonable

At the same time, be sure any antifraud policies you develop are reasonable. If your definition of reimbursable expenses is excessively narrow, employees may be more inclined to lie on their expense accounts to make up for out-of-pocket expenditures.

Finally, ensure that everyone in the organization is held to the same standards. Your CEO cannot be immune from scrutiny – especially because a CEO who cheats on an expense account may be perpetrating other forms of fraud, including falsifying financial records.

Rea & Associates, Inc.